 Good morning, everyone. Can I have your attention here? Welcome to CSIS. My name's Johanna Nessith, and I'm Senior Vice President here, and I co-direct our project on U.S. leadership and development. I want to welcome you today. This is part of our Chevron Forum series on development, and we're really pleased to have you here. Scott Miller, who has put our program together, and is going to moderate and sort of facilitate the entire discussion today, just said this is like a brief crash seminar on global value change, so I hope you all will be prepared for your certificates at the end of this. I want to make a note about why we're doing this under a development tent, because it's part of a much broader effort, and I hope that you all will think about it, give us feedback, take this back to your offices and your teams and your thinking. We have had a project underway for the past three years. It's a partnership with Chevron, looking at the role of the private sector and business community in development. In March, we put out a major publication. It was the result of a one-year-long sort of commission process co-chaired by Tom Dashel, Vin Weber, Carly Fiorina, former CEO of Hewlett-Packard, and Tom Pritzker, who's the CEO of the Hyatt Corporation, and then with Henrietta Forre as our honorary co-chair. We really spent a year looking at how the private sector is engaged in development, looking at current capital flows to developing countries, and the role that the private sector has taken to all of our surprise as we look back. It's just a really dominant role in engaging and investing in developing countries and trying to find ways that the U.S. government can work more closely together with the private sector, at least facilitate that type of investment in a way that promotes development. So as we have looked at the follow-on discussions, as we've briefed out the report, as we've talked to different folks, I think an interesting thing that we found is that the development community is pretty much on board with this idea now. For a while, they were maybe a bit resistant because it was a little uncomfortable to think about multinational companies engaging in developing countries. There were some uncomfortable things about it. But I think for the most part, AID has really embraced this. MCC and other groups really want to see it move forward, still trying to figure out the best way. But the private sector, the business community, the commerce and trade folks are still trying to do business, and they're not quite sure where this fits in their process of doing business. So I think one of our hopes today is we really look at how business intersects here and how it actually can be good for business. So it's not just part of your corporate social responsibility activities, but there's really an integrated way to promote economic growth through business operations, activities, and processes. So we're going to start today with a set of remarks by Dr. Nancy Lee. Nancy is the General Manager of the Multilateral Investment Fund at the International American Development Bank. She's quite a Latin Americanist. She served as the Deputy Assistant Secretary for the Western Hemisphere at the Department of Treasury, so she's got a strong finance and trade background having worked on NAFTA and Uruguay Round negotiations, but also has worked a lot on development, spent a year at the Center for Global Development. So she's really an ideal person to talk through some of these issues with us. Following her remarks, we're going to dive in and Scott's going to take us through a set of discussions on sort of how global value chains, global supply chains work and what are some opportunities to really look at those more carefully and thoughtfully. So with that, I'm not going to give much more of an introduction because you've got her bio, but welcome, Dr. Lee, and welcome to all of you, and thank you for joining us. I hope you'll be able to participate and take away a number of ideas from today. Here you go. Thank you. Thank you so much. This is an honor to be here and really a pleasure. And I have to start by congratulating CSIS on convening us all around these topics, development, trade and value chains. It's a very hot topic. I know there is a large part of the development community in the audience as well. It's a public sector and it's also a topic in which there is a lot of innovation going on, social innovation, social entrepreneurship, social business models, which converge with value chains. So, and as a development practitioner, as well as an economist, I would say some of our most impactful projects are in the area of value chains because of their sustainability, their commercial sustainability, their scalability, the ability to reach really thousands of small actors and low income actors, and their very low cost in terms of public subsidies to make them work. As you will see from what I'm about to describe, because I'm going to show you a few project examples, the difficulty is actually not finding the finance. It's more convening the partners that you need to convene in order to solve the collective action problems, but that's, of course, inherent in value chains. But let me just, I'm going to use a PowerPoint and you're going to understand why as we get further into it. To summarize what I'm hoping to cover, I want to tell you a little bit about the Multilateral Investment Fund. I realize it's not a household name and I want to describe what it is. I'm going to give you the sort of three minute version of the evolution and support of SMEs in value chains. Talk about what's changing in terms of the motivation of large firms. As we just heard, there's sort of a change in the attitude of the private sector. Talk about what that implies for capturing value for small actors. Talk to you about five project examples. And then I also want to talk to you about value chain finance, which is a key part of making all of this work. So the Multilateral Investment Fund is actually a bipartisan child originally of the Bush 1 administration and then launched in the Clinton administration about 20 years ago. It's a very innovative organization from the start. It's best understood as the laboratory inside the Inter-American Development Bank. We were always supposed to innovate, take risk, and do things on a small scale in order to identify models that can be scaled. So our donors are exceptionally tolerant of risk. Our clients are micro and small firms, small farms and poor and low income households. We are not organized by sector. We are organized in an access framework, the tools to empower our clients, access to finance, access to markets and skills, and access to basic services and green growth. Unusual among development organizations, we can do grants, equity, and loans. And in fact, most of what we do are grants and equity. It's 90% of our annual approvals. 70% grants, 20% equity, and then 10% loans. We never do a project if we can't find somebody else to co-finance with us. 45% of our staff are on the ground. We have 39 donors, which you'd think would be a nightmare in terms of governments, but they're pretty happy with what we do. We only do $100 million a year total, and we do about 90 projects, which gives you a sense of the scale of our projects. Very, very small. This is another metaphor for us. A bridge, or in this case, a gear. We are much too small to substitute for private finance, so we have to essentially address the market failures, which are preventing the flow of market finance. That's why we need grants to fill information gaps, address skill deficits, help build the regulatory systems. That's why we're engaged with the public sector as well as the private sector. Strengthen private sector institutions like financial institutions, pharma cooperators, things like that, and convene actors, and using the equity in particular to share risk. The scale of this is completely off. Obviously, we're a very, very small gear. The public sector and private sector are very, very big gears, but I think physics tells us if you're a small gear and you're driving bigger gears, you're magnifying the force of the bigger gears, which is, I think, what our donors want us to do. So this is 15 or 20 years of empowering for small firms, at least from our perspective, and I think the perspectives of some other development actors. The focus in the mid-90s when we were founded was very much the enabling environment, the policy regulatory legal environment. This was the time when, in order to help a small firm, what we did is train them in business development services individually. The doing business reports came into play in the early 2000s, mid-2000s. We worked with sectoral clusters. That's horizontal linkages between small firms within a sector. It was very much drawing on a European model. And with inward-looking incubators. That is, incubators which essentially took entrepreneurs out of the world, isolated them so that they could think about and be creative about creating their firms. That was the kind of incubator that we supported in the early 2000s, wasn't very successful. Then you had, in the middle 2000s, the advent of direct involvement of anchor firms, which changed really the dynamics. The anchor firms became the driver of SME development and linking SMEs to each other and to larger value chains. We then saw the rise of the term inclusive business, shared value. The incubator concept changed radically. We moved into things called accelerators, which are entities which work with startup entrepreneurs, not to isolate them, but to connect them with business networks, with mentors, with funders. It was a reverse of the concept. It was how do you connect a nascent entrepreneur with all of the players that he or she needs to be connected with. Now you could say that we've entered a third phase, which is the social innovation and social business model phase, which is kind of overlapping shared value, where we are now much more focused on businesses which create social value. This term social business model is kind of used very loosely. People have different definitions. Some people define a social business as simply a business that produces a good or service which has social value and particularly can be consumed by low income populations. That's not how we define it, although it's something that doesn't have one definition. We define it as a business that uses part of its return to fund something that has social value. So the good or service that it sells in and of itself doesn't have to be a socially relevant product or service, but it has to use part of its revenues to then fund something that benefits a community. So I said that there was a change in the perspective of large firms and some of you in the audience are large firms. I'm just going to tell you what we're hearing from the firms that come to us that want to do projects. The first thing we hear is that they want to engage with SMEs in their value chains for cost reasons. In Latin America and the Caribbean in particular, there is a strikingly large gap in productivity between large and small firms and a corresponding gap in cost structures of large and small firms. So if you're a large firm, you have a very powerful incentive to source some of your value from SMEs as a cost-cutting tool. In addition to that, there is the greater emphasis on greening production chains means that you have to focus on your SME suppliers because as we'll see in a second, they are a principal source of CO2 emissions. So if you want to green your value chains, cut the costs, you need to focus on SMEs. I'm talking totally here about business model reasons, nothing to do with CSR. For commodity purchasers, there's a powerful desire to have small producers organized, improve in productivity, improve in quality so that you can be assured of a growing stable source of commodities. In Latin America, a lot of the coffee production, cocoa production, stevia production, sesame, amaranth, quinoa are small producers. And if you're a craft or Starbucks or Nestle, you don't want to get into the business of organizing thousands and thousands of small producers and teaching them how to produce the product with your quality standards. You want to help with that. And finally, you have these upwardly mobile populations in Latin America as well as other emerging markets. These are the middle class but also what's being called the vulnerable class which is a class which has risen out of poverty. It has not yet reached middle class income levels but its consumption patterns are changing. So if you want to reach that population and you're a large firm, you are naturally focused on women entrepreneurs because you know that women largely control household consumption decisions. So firms come to us and say, we want to reach women, it's logical for us to engage with women entrepreneurs because we're pretty confident that they can be a force for marketing effectively to women. In addition to that, you can't only rely on large scale retail if you're trying to reach populations that are outside urban areas that are hard to reach by standard retail stores. So you need to have distribution chains with small actors that allow you to reach peri-urban areas, rural areas. So there are distribution reasons that you have to work with small actors. So it's not that CSR has disappeared, it's that there are a lot of commercial reasons that firms want to engage with small actors. So I wanted to just show you a cross-country view of the challenge of capturing value if you're a developing country. And this is an example which is a little outdated at this stage. It's an iPod example and it shows you the distribution of value in producing an iPod in kind of three slices. The first slice is the tech heavy slice, the middle slice is assembly, and the third slice is design and distribution. And what you can see is that the value is concentrated in the tech heavy slice and the design and distribution slice. And that tells you if you're a developing country, you need to be able to move, grab value from those parts of the production process. And of course if you're China with rapidly rising wage rates, your competitiveness in the assembly slice is eroding over time, which is another driver to move to these other areas. So that has implications for the kind of development project you can do in order to grab those slices of bag. One other example of this, which is the agricultural value chain, and we wanted to show you a coffee value chain, the old-fashioned traditional coffee value chain, and the fair value chain. And so on the top you can see that for the producing country, the traditional coffee value chain has a fragmented set of actors. It has small farmers, it has some intermediary between the farmers and the processing plant, and then it has a local exporter. And the small producers themselves capture a very small share of the value, 6% others in the producing country around 11%. So we're talking about, you know, maximum 20% of value in the producing country, 80% of the value in the consuming country. The fair value of coffee chain of course increases the absolute value of the whole coffee chain because of the price premium, but it also redistributes the share of value among the actors. So you can see the rise of farmer cooperatives under the fair trade coffee chain. Which represents the consolidation of market power. In other words, the small farmers become members of cooperatives and the cooperatives organize them, increase the quality of the product and the volume of the product and the consistency of the product. They also start to capture part of the processing value. So all of which gives the producers a much larger share of the overall value. In this particular example, 29%. So we shifted from a sort of 2080 producer consumer country share to a 40-60 share. And in some cases the farmer cooperatives export directly to the roasters, which captures even more of the shares. So what does all of this mean if you're a development practitioner and you're trying to figure out how to increase the market power of small actors? It means that you need to be focused on competitiveness, on productivity, on technology, operating skills development and greening value chains, working with small actors to green value chains. Branding certification and standards has high potential for increasing value. You need to worry about how to make small-scale distribution chains more productive and more attractive to large companies, searching for distribution channels which reach new consumers. If possible, you need to get small actors involved in product innovation and design. Pursuing social business models is also an effective channel, which I'll come back to, and then you need to worry about the finance problem, how to finance these small actors. So what I want to do is I want to show you a development project that is an example of each of these channels. But first, this is just to give you a sense of the kind of partners that come forward and work with us, and I know many of you from developing agencies work with the same partners, but you can see we're talking about a whole range of large companies, commodity purchasers, infrastructure companies, retail distributors, consumer goods producers. So it's a wide variety of companies that are interested in this kind of activity. So this is the first project example. This is an example of a project where Walmart and FEMSA, Mexico, the Coke bottler, came to us to work with us on greening their value chain. And they did that partly for corporate social responsibility reasons, but also partly for cost regions. And also I would say because there's an increasing understanding now, which I think is fairly new, that small companies are actually dominant players in CO2 emissions. Whereas two or three years ago, I think people would focus on working with large companies if you're interested in reducing emissions. People now, having done studies that audit CO2 emissions throughout the value chain, understand that actually the majority of emissions comes from the small suppliers. The 86% that you see in the second bullet comes from an energy audit done by Siemens. So between investor and shareholder pressure to green cost issues, government client issues, there's a lot driving the desire to work with SMEs on greener technology. In our region in particular, the customers are also driving this interest because they are actually demanding greener products. So here's what the project looks like. And this is why I insisted on doing a PowerPoint here. It's kind of complicated to explain verbally. There's going to be a common thread in all of these projects. If you look at the bottom right hand corner, you're going to see that they're all very inexpensive. They're all going to be less than $10 million total. And you see always the MIF contribution and the contribution from our counterpart co-financers. So money is not the issue. It's the convening that is the difficult issue. So in this particular case, the MIF, FOMI in Spanish, funds an executing agency, number two, Tecta Monterey, which is a prominent Mexican in university. They develop an online platform to train SMEs in identifying their energy cost truckers and in auditing their value trains. The anchor firm, FEMPS and Walmart, encourages their SME suppliers to achieve COT emissions goals. We mobilize green technology providers to provide the kinds of technologies which will allow the firms to reduce their CO2 emissions. And then we partner with a financial institution to finance the SMEs to purchase the green technology, which in this case is Banorte. So in that way, you can use the power of the anchor company to motivate these changes. You can reach 3,000 MSMEs. And the anchor companies are a powerful force, especially in motivating their suppliers. And then once you develop this online platform, you can use it for many, many companies and for many, many anchor firms. So it's a tool that's obviously scalable and really becomes a public good. Second example, mangoes in Haiti. So this is now working with farmers. Haiti used to be actually a significant mango exporter. It's still one of the 20 largest mango producers, but now it exports only less than 5% of its production, largely because of weaknesses in the value chain. So the idea is to enhance small farmers' capacity to produce and transport exportable quality mangoes. And the goal that was set for that project is to double these farmers' mango income. So in this case, we have another complex. The whole thing, again, it's less than $10 million. We have a complex chain which starts with funders. USID is one of the funders. Coke is one of the funders, et cetera. The executing agency is TechnoServe. TechnoServe trains the farmers, trains the producer associations, which are farmer cooperatives. In order to produce exportable mangoes, the exporters then export at the moment to Whole Foods. And we're proud to say that every single whole food store in this country sells Haiti mangoes in season. And there's a financial institution, Sojourn Soul, which is a microfinance institution, which finances, actually this is a little bit misleading. It actually finances the individual farmers with microfinance loans. So we're reaching 25,000 farmers. It hasn't been easy. And we've learned along the way we're going to have to do more than correct the value chain issues. We're going to have to help the farmers plant new mango trees. But I think we're pretty confident we're going to achieve the results. Here is a distribution example. With Saab Miller, the beverage producer as the anchor firm driver. And Saab Miller, like Coke and like other beverage producers, is facing a kind of saturated market in the urban areas. So if they're trying to expand their customer base, they need to move outside the urban areas and find distribution channels. And what they want to do is help family-owned stores to become more productive and growing distributors. That helps, obviously, the mom-and-pop stores, but it also helps them reach new clients. So this project, again, you have a funder. You have an executing agency. This is a regional project, so the executing agency is going to vary by country. It trains the small shopkeepers, many of whom are women. And by doing so, Saab can sell more to those women-owned small shops. There's a micro-credit supplier to the small shops to allow them to expand. And this becomes a social business model because then those women-owned shops become community leaders. And there are knowledge partners that teach the women to provide other services in their communities where they are major actors. Education services, access to other kinds of services like insurance, various kinds of community-building activities which can be driven by convening around these small shops. This is an attempt to get small actors involved in product innovation. Wacami is a global brand of artisan jewelry. I think it's just jewelry. And this is a project which reaches rural women, rural poor women in Guatemala and connects them to that value chain and helps them capture some of the value of the product innovation. By the way, this bracelet is an example of the product innovation. These are Wacami bracelets. So in this case, you have the funder engaged with an NGO, Communities of the Earth, which is the instrument to connect with the individual women producers. And that NGO is funded by an anchor firm, which is a commercial firm, which is the merchandise distributor and the source of product design and the source of training of the women to participate in product design. So for example, these bracelets were partly designed by the women in the rural areas based on the materials they had available to them. Then the product is sold by Wacami on a website or in retail outlets in Europe and the United States. And then the communities benefit from the activities driven by the women. And again, these are education, health insurance activities. So part of the value that produced by selling this jewelry goes back to investing in the communities. One more model, which is very different, which is using the power of outsourcing to connect with small actors. And this is a company, Digital Divide Data, which outsources computer services to young people and then uses part of the value of the business to fund university scholarships. So just to go to the project. So we fund DDD. It then provides computer services to companies like Readers' Diedress and World Vision. You know, their digitalization services, their data entry, using these young people. The young people are paid for their services, so they get income. And then part of the profits made by DDD go to educational institutions to provide scholarships for the young people. So this is a very sophisticated social business model in which you're trying to capture more value through entering sort of tech services and then take some of that value and invest in young people. Again, the whole project cost $2.6 million. Very sustainable. Okay. I just want to mention two projects that have to do with value chain finance, because obviously finance is a critical component of a lot of these models. And I want to mention one particularly innovative model called, that's run by Trefi in Peru. Just because it's one of the most scalable and innovative that we know about and maybe some of you know about it as well. So it's basically a model which uses a computer information system to assess the credit worthiness of small scale distributors of products produced by large companies. That's in a nutshell. So here's the schematic. Starting with step two. The small enterprises are shops, small distributors. They buy products from Procter & Gamble Diageo. You know, soap products, beverage products, and distributed them. They then owe the corporate supplier receivables. So you have accounts receivables which are then held by the corporate supplier. That corporate supplier, which you know is reluctant to do a lot of supplier credit to these small shops because it's very hard to assess their capacity to repay, then takes those accounts receivable and sells them to a special purpose vehicle. And what I'm basically describing is going to be an asset backed security. Okay. They sell at a discounted price. The cash then goes back to the corporate supplier. That special purpose vehicle creates an asset backed security. The role of Trefi, and this is the innovation that makes it work, is to use big data to assess the credit worthiness of each of these thousands of small enterprises. All kinds of data. You know, bank data, tax data, social media data to create models that predict their credit worthiness. And that's why the special purpose vehicle then can get a risk rating for these asset backed securities and actually slice the risk up to sell to different investors. And in the initial pilot, Cofide, which is a public development bank, brought the asset backed securities. I wanted to show this because this is very scalable. Of course, once you create one of these big data platforms, it's inherently scalable. You know, the startup costs are the highest costs. Adding more data actually has a very small marginal cost. So we have 8,000 firms that have been served so far in Peru. We're very confident it can be scaled in other places. So this is an example of using the value chain, not for product distribution and sales, but for mobilizing finance for small actors. And then finally, I wanted to just mention the root capital model, which I think is more familiar perhaps to many of you, which is a model which uses purchasing contracts for commodities to secure lending. We know that financial institutions finance only about 10% of pre-harvest financing needs for small-farmer cooperatives. And it is a major constraint in terms of their ability to grow, to respond to demand for these high-value certified products. So the root capital model basically involves a link between root capital as the social investment fund, which provides training to the farmer associations to improve the quality of their products and to expand volume. The farmer associations then provide their purchase contracts to root capital to secure loans from root capital to those farmer associations. And the purchase contracts come from coffee producers, for example, Starbucks, Sustainable Harvest, Green Mountain. So the purchase contracts are securing these loans and enabling root capital to finance and train an ever larger volume of farmers. So this is an example of value chain finance which can work in the agricultural sector as well. So to close, to summarize, basically we have seen a pretty dramatic evolution in efforts to empower small firms and link them to value chains. We are now much more focused on including them in the value chains of anchor firms rather than engaging them individually or establishing horizontal connections between them. The companies that are driving these value chains are large companies. They're driven by very much business considerations as well as CSR. Cost considerations, sustainability considerations, rising commodity demand and rising demand from socially mobile populations. And so to respond to those drivers, development institutions can support things like increased competitiveness, a focus on branding and certification, getting small actors involved in distribution, in product innovation, in social business models and in building value chain finance models. So and the role of an organization like ours is to take the initial risk, to innovate, to take the prime mover risk, to use grants to solve some of the information and skill problems and to admit most difficult and perhaps most significant is to convene the right actors and bring them together. And as you've seen in all of those schematics, there are multiple actors that have to be brought together to solve the collective action problems. And then finally, what we really need to do is develop metrics to see whether we're actually raising the incomes of the small actors that we're reaching. Thank you so much. Thank you, Nancy. And I'd like to invite our first group of panelists up to the front of the stage. My name's Scott Miller. I'm the short chair in international business here at CSIS. I run the international business program. I used to be working with the U.S. leadership and development project on this initiative. We're going to shift now to a broader discussion on the rise of global value chains and what it means from a policy standpoint. Global value chains have radically influenced the patterns of trade and the way things are made in the world. Like any other major economic change, it's of multiple factors involved. The principal one is technology. And anybody who's lived in the last 25 years and has been sentient would recognize that there have been massive changes in information communications and transport technology. What this has done is lowered the barriers to the transmission of good services, people, ideas, and culture. It's often called globalization. It's a technologically driven factor. It's a better way of doing things. And indeed some of the key researchers like Richard Baldwin call it globalization 2.0. 1.0 was the industrial revolution. That's how different this is now. There have also been policy changes that have helped globalization or helped this process of global value chains emerge. Most importantly, the opening of China, the fall of Soviet communism and central planning broadly, and the opening of markets broadly through the last 20 years through lowering of tariff barriers. Commercially, most firms approach this new set of opportunities as a way to specialize and improve their business. Specialization is not new. In fact, in 1776, Adam Smith in the wealth of nations wrote that the degree of specialization is only limited by the size of the market. As the market gets bigger, specialization increases, and firms are able to specialize in a way that makes the most sense. So today's program from here on will be a deeper dive into the global value chains and how developing economies can benefit from these global value chains. The first panel will be the policy backdrop. Then we'll have a presentation on some exciting new research of how we measure trade and how basically the way we've been measuring trade for the last 50 years doesn't make sense. There are new ways, we'll present those new ways. And the second panel will then come and talk about how developing economies actually operationalize life and global value chains to succeed. I'm delighted to welcome the first panel today to provide the policy backdrop. The first speaker will be Ted Moran. Ted is the markets Wallenberg chair in international business and finance at Georgetown University School of Foreign Service, and is simply the most knowledgeable person in Washington on issues of foreign direct investment and development. He's written about it for years. I hope you got that on tape. We'll send a copy to your family. Do you want me to use it? You can hear me with this. Nancy Lee's presentation was so marvelous that I'm hoping I can live up to the same level. Let's see. Do I, how do I move this? There you go. Okay. Well, I'm going to begin with a point that all of us in this room will agree with. And that is we will all raise to talk about trade. And today we have to shift what we think about and talk about trade and investment. Because multinational corporations account for 80% of all cross-border flows, 80% of all cross-border flows either within their inner affiliate transactions or as part of their supply chains. Now, I am going to, I am very interested, both from an academic point of view and from a sustainability point of view in the universe that Nancy was talking about. But my space is broader in the sense that we often think that low-skilled activities are the primary assembly operations that multinational corporations have in developing markets, garments, footwear, and then the kind of agricultural supply chains and other supply chains. But in fact, the bulk of all supply chains are not in lower-skilled activities but in medium-skilled activities. So transportation equipment, that means auto parts, industrial machinery, electronics, electrical products, scientific instruments, medical devices. Well, I laid this out, and this is 14 times larger. My students come and say, well, multinational corporations go to the developing countries to take advantage of cheap labor. Well, relatively cheap labor. But these are actually middle-class and lower-middle-class jobs that make up the bulk of supply chains. And the area that I am interested in is a little bit different. Building industrial clusters and export zones but industrial export zones for all of these kinds of products. And I mean, my own work besides my research right now happens to be in Morocco, in Tangier, building an export hub right across from the EU for when the EU returns to business. And also in South Africa. I mean, that just happens to be where I am working. But this is a kind of, this is a clustering phenomenon and a supply chain into the mainline operations of multinationals that is my universe that I am talking about. Now, this is supposed to be about policy and the biggest policy debate surrounding these type of supply chains is the runaway plant debate. Does outward investment by U.S. firms substitute for job creation and investment at home or complement it? And here with Scott's permission I am going to report on some new work that was done at the Peterson Institute for International Economics. I am not touting my own horn. I mean, I and Gary Huffbauer wrote the book but Lindsay Oldensky, a brilliant econometrician did the heavy lifting. And we looked at the substitute or complement debate and found out that an increase in FDI by a U.S. manufacturing firm is associated with an increase in domestic activities. So this is a complementary phenomenon. I'll come to the policy implications in a minute. So our results show that if a U.S. firm increases employment at foreign affiliates by 10%, domestic employment goes up by 4%, not in every case. I mean, there are runaway plants. We all know cases of that. But the overall phenomenon is a complementary phenomenon and capital expenditures go up at the same time. A new finding has to do with the globalization of R&D which is here in Washington very worrisome. Oh, what happens when we build campuses in China or in India or in Eastern Europe? And what you find is that when a U.S. M&C increases R&D abroad it actually expands its R&D at home. And an odd finding is that firms that don't engage in overseas R&D don't tend to do so much R&D at home too. So this is a very strong complementary effect. And talking about contemporary debate about tax policy and tax policy toward multinational corporations, the policy implication of these findings is that if our beloved Congress takes measures to make it more difficult or to penalize M&Cs for moving abroad it will weaken job creation, investment R&D and exports at home rather than strengthening it. Now, I invite you to take a look at the analysis because I know this is not what you hear most of the time wandering around the streets of Washington. Now, I'd like to... So M&C supply chains, even in this middle level auto parts, industrial parts, pharmaceutical, medical devices, chemicals, petrochemicals, this realm of activity are not threatening to the U.S. home economy. Incidentally, we didn't do this for Europe or Japan but there are complementary econometric studies that have been done so that this is not unique to the United States. You find this in other industrial countries. So I want to conclude with the policy looking from the point of view of the host government or multilateral institutions. What can be done to foster supply chains in developing countries? It's a minute and a half, no more than that. But, well, first of all is the old view. How do you foster supply chains? Well, you impose performance requirements on the M&C's. You make them do domestic content. You make them do JVs. You impose technology transfer requirements. That's the old view. Why did I call it the old view? This is China's view. So I mean, there is a lot of this still going on saying this is the way to build supply chains. The new evidence that we've reviewed is you begin with improved doing business indicators because local suppliers need good business climate just like foreign investors or anybody else. You can't treat them miserably or have huge amounts of red tape and corruption and then expect that you're going to see them flourish. Access to imported goods. This is a new... We all think imports are good for consumers. Increasingly, we know that imports are good for the competitiveness of firms because depending on the industry, 60%, 70%, 80% of the imports are intermediates. Our inputs that help make the firms more competitive. So we don't have to just go around telling our students, you know, don't beat up on imports, but you know, it is a step toward the competitiveness of the local suppliers and then programs, as Nancy was talking about, certification for efficiency and quality control. I think the evidence indicates that the three principal areas where external assistance is needed is to help with competent investment promotion agencies. Trying to get middle-skilled multinationals to move into Tangiers in Morocco or to move into South Africa. I mean, the two cases that I'm looking at, it's hard to do. I mean, and you have to figure out and it's not just piling up tax breaks and subsidies. I mean, it's really... So, good investment promotion agencies and then a big role for public-private partnerships for vocational skill-building so that when they come to Morocco or South Africa or the Philippines, they can partner with vocational institutions on the ground to get the kind of managers and supervisors and workers that they need. And then infrastructure clusters with industrial parks or agro-processing facilities. I think this is also true for the kinds of things Nancy were talking about, but for industrial centers and industrial parks, it's particularly clear the infrastructure. I'm done. Just let markets work is not enough. Just improve doing business indicators is not enough. You can't just say this will happen on its own. Supply chain development in industrial countries requires light-handed support. I'm not talking about big industrial policy, Chinese-type sectors and requirements, but light-handed support by developed countries, multilateral financial institutions and developing country agencies. Thank you. Thank you, Ted. Extraordinary overview in a short period of time. We appreciate that. Next speaker is Juan Blyde. Juan is Senior Economist at the Inter-American Development Bank, and he's leading a very exciting major research program on how developing economies can improve their policies and improve their success with global value chains. Juan? Thanks a lot. I would like to start by thanking Scott for the kind invitation to come to this excellent conference to talk about this interesting topic. As Scott said, we are the Inter-American Development Bank, particularly in the integration and trade sector. We are doing some research for the last three years on how Latin American countries are inserted in this global value chain. So what I'm going to do is just to share some of the findings that we have here. So you will have a perspective from the point of view of the developing country or what are the challenges, the ferns in this country's face to access this value change and what are some of the policies that countries have implemented, which in many ways are going to be complemented to what you saw from Nancy's great presentation. So one of the first things that we wanted to do is just to measure how much countries in Latin America are participating in this value chain. So we look at FDI data, which is the topic of this panel. Specifically on Don and Brastry data set. So we look at the multilaterals around the world and the subsidiaries of those multilaterals that are vertically linked to them, meaning a subsidiary or affiliate that produce an input or a component to that parent company. So let me show you a picture of that data set. In the circles you see the multinationals in the world. The bigger the circle is, the more parent companies, the more multinationals the country has. So here is no surprise. The United States, the country in the world has more multinationals in the world, followed by Germany in Europe and you have Japan, the third country. So then the lines represent where are the affiliates of those parent companies in each of the countries. So for example, you can see that the United States has a lot of affiliates in Canada, for example, the UK. You can see in Asia, for example, Hong Kong has a lot of affiliates or subsidiaries in China, Japan also. But I would like you to focus the attention of Latin America. It's the same with Africa. They are really playing a marginal role in this fragmentation of production between parent companies and affiliates. So you can say, well, what happens is that the Latin American countries are small countries so they don't have the capacity to host that many affiliates of multinational companies. And since that's true, you can see that in this graph. This is the same data presented in a different way. On the vertical axis, you have a number of vertical subsidiaries that are linked, vertically linked to the parent of the country. And then on the horizontal axis, you have the GDP of the country. So you see it's a positive relationship that countries that are bigger host more subsidiaries from multinational companies. But as you can see, the red dots are Latin America and they seem to be almost all of them below the trend line. Meaning that Latin American countries seems to have less vertical subsidiaries than what you should expect given their economic size. So this is one of the many indicators that we have. Of course, Latin America is not a monolithic region. Mexico seems to be right according to this measure. But on average, that seems to be the case, which is to support the general perception that people have that Latin American countries are less engaged in global supply chains than other regions like Asia and stuff. So then the question, obviously, is why? So we look at several different issues. I'm going to show you one of them, which is the role of transport and logistics infrastructure. So here is the same data. We divided the countries in four groups. The group four is the country with the best quality of logistics infrastructure in the world. Group one is the country with the lowest quality of logistics infrastructure. In this relationship, the group four countries hold more than 70% of all the subsidiaries that are vertically linked to their parent companies. Well, the group one only holds less than one percent. So there is obviously a positive relationship between the quality of logistics infrastructure and the capacity to hold subsidiaries that are linked in a value change to the parent company. So what we did is a little more sophisticated econometric analysis to try to isolate the role of transport and logistics infrastructure from other factors. And then we ask a simple question and we simulate what will be, how much will increase the number of vertically subsidiaries that I host if I increase the quality of the logistics infrastructure in my country to the average level that we're set in the EU. And that, by quality of logistics infrastructure, I'm talking about the quality of airport infrastructure, the quality of port infrastructure and the quality of IECT, which is information and communication technology. And this is the result that we got. It's pretty amazing. It's around 15% for the average of Latino America, which we think is very high. And of course, for some countries like Haiti and Paraguay, which have a larger gap in terms of the quality of the logistics infrastructure with the EU, the increase will be higher. So this, also, it will tell you that there is a lot of homework that the American countries definitely has to do in this particular area of transport and logistics infrastructure. I can talk for hours about this, but I don't have the time. We can do it on the Q&A session if you want. I just want to mention briefly something else that I think is very important that comes out of this project. And as you mentioned a little bit, it's the issue of coordination failures. And that came through some case studies that we run for this particular project. You can have the best ports, you can have the best airports, but still there are a lot of companies that are not going to be able to be inserted in this global supply change because they need the right skill and capabilities to do so. We saw that the typical firm that is inserted in a value chain has the capabilities the ones that are just serving the domestic market. That's typically the case. Now investing capabilities is mostly a firm's choice, but sometimes that can be hindered by information problems, by coordination problems. I might not know precisely what are the capabilities that I need in order to sell to Walmart because I'm not selling a commodity so the price information is not enough. The buyer might not have enough information to know if you are reliable, if you are good quality because it's exactly the same thing you are not selling a commodity, the price information is not enough. So this matching might not take place. So let me tell you, and with this I will finish, some of the things that governments are doing around Latin America to address this type of problems. Let me talk about Costa Rica Prove. For example, but this will allow me to talk about some of the things that governments in the region are doing and it will also allow me to tell you what is missing from this thing. So Costa Rica Prove is a program that is run by the trade promotion organization of Costa Rica, which is called PROCOMER, and it's based on a matchmaking service between the multinational that are located in Costa Rica and the local suppliers, potential local suppliers there. So they address the needs of the multinational in terms of what are the inputs, components and raw materials that they need and so then they try to do the match with the local suppliers that they can comply with requirements that the multinational companies pose. Now as you can see in this graph this program has been successful. These are the number of linkages between local suppliers and the multinational in Costa Rica and has been growing since the program in 2002 and the total sales also has been increasing. However, an independent study evaluation of this program that took place recently said that it was a very good first step but the scope is still limited for, you know, these reasons that's what it says. The size of the program is relatively small. I mean we're talking about only $300,000 for five years so it's not a lot you can do without money so it's almost, almost surprising that you see these effects with this amount of money. They only provide matching services so they only address the information failure, the information problem and not many other problems like for example Nancy was mentioning life financing, the needs for financing the needs for training and they, you know, they did not coordinate with other programs that exist in Costa Rica that precisely address other issues so the government is now rethinking the program and is trying to coordinate with other programs in order to try to have synergy by combining different programs so these programs will be more helpful. This actually has been the experience in other countries like Malaysia, Singapore and so on. So I will finish here. I just want to say that this research is going to be ready probably by the beginning of next year. Of course you're going to be able to put this report free and it will include many other things that I don't have chance to talk about. Thank you. Thank you, Juan. Wonderful example of, in Costa Rica pointed out by Juan of exactly what Ted was talking about with his soft support from the government. There's a role. It also reminded me of Juan's point about know-how. It's not just building good ports. As Richard Baldwin says, know-how is the cause. Trade is the effect. If you want trade, you've got to have the know-how. And it's this knowledge and connection that is now possible because of communication technology but is essential because of segmentation and fragmentation. In any case, thank you Juan. I really appreciate that. Let me introduce our third panelist, Clay Lowry, Vice President of Rock Creek Global Advisers. Clay was Assistant Secretary of Treasury for International Affairs and brings a wealth of experience both in managing U.S. from the Treasury Department and also his role in private practice advising U.S. clients. Clay? Thank you, Scott. And thanks for having me here. I'm going to talk a little quick because I actually planned for a 10-minute presentation. So I was trying to think of what I could do to help you guys out a little bit from the audience perspective. Ted is an expert. Juan has done some amazing research. Nancy's working in the field forever. By the way, I worked with Nancy for over 15 years, so I'm very happy to be following her. I want to provide the comedic approach to this whole thing. My wife then said to me, what are you talking about? And I said, oh, global value supply chains. And she's like, there's no comedy. Oh, good enough for them. So the timing of this conference is actually excellent for two aspects from a U.S. perspective. First is this is a week in which you're seeing a lot more activity regarding TPP, the Trans-Pacific Partnership Trade Agreement, which will get you into a lot of value chain type of ideas, rules of origin, et cetera. You're seeing people starting to advocate on behalf of that agreement. Obviously, there's an attempt to try to get it done by the end of the year, which may be a little ambitious, but I think that the timing is very good. The second aspect is just this week, the U.S. government is holding a very large conference on foreign direct investment into the United States. How do we attract it? Is it really a harder sale than it used to be? Just look at what's been happening over the last month with all the political shenanigans about just our budget. And also, frankly, the roll out of Obamacare, so to speak, because it just kind of shows a little bit of, well, frankly, some incompetence on how the government actually operates. So probably not the greatest time for that, but it's probably a very good thing that the Obama administration is trying to lead that effort. So what I thought I would do is just kind of, you've heard about some of the statistics, you've heard about some of the field studies and some of the research. I just want to hit on a couple points on where I think that it could actually affect broader policy thinking from, hopefully, in my opinion, from politicians on Capitol Hill and the executive branch and also some policy makers themselves. The first thing is like, if you look at there's an OECD WTO study that basically says that roughly 30 to 60% of all G20 exports consist of intermediate imports, 30 to 60%. And their growth has been around, from the growth of intermediate exports has been about 30 to 40% over the last 15 years. That's incredible. So that means that basically we're thinking about like when we export something or when we import something and we say it's a U.S. good or a Chinese good or a Japanese good, that's really not as true as it used to be. And so what could that mean from a perspective on how we look at the world? Alright, so let me take you back a little bit. In the late 1990s when I was working for Hank Paulson at Treasury we came under a lot of strain from Congress, but not just Congress from other people as well, about our bilateral trade deficit with China and how we had think tanks very well known think tanks in this town saying China is a manipulator look at the bilateral trade deficit I'm not sure if they'd remembered their economics bilateral trade deficits don't mean that much but that's how basically people thought of it. Alright, so I recall we and a guy named Bob Donner at the Treasury Department found a study that had been done at Stanford that basically said in 2006 that if you looked at the value added bilateral trade deficit with China as opposed to the actual nominal one it would be cut by 80 percentage points. 80 percentage points. Okay, that suggests that instead of having a 200 billion dollar bilateral trade deficit at the time we really had probably one that was closer to 40 billion if you looked at value added content. That actually is a significant change and it actually hopefully would significantly change how people thought of what was happening and how to make policy. So, what I wanted to suggest is that that Stanford study though was unique, nobody could find it I didn't know where it was, Bob found it. Now we have the WTO and the OECD basically trying to put together a comprehensive and analytical perspective on all of these issues and they actually just did a report to the G20 just about a month ago they're still working on these issues but I think that if we could actually finally find ways to get this forward, make it more public whether it's through the Peterson Institute CSIS and others that maybe politicians can start thinking about this and we can create a little more sobriety in our thinking. Look, it's hard for us to jump for it's easy to look at a nominal trade deficit or what does the currency look like but I think that if you provide real facts, real figures to people maybe politicians and even like policy economists can kind of overcome some of these let's try to get a headline and instead let's try to actually find a better way of doing policy. A second aspect of this that I was thinking about this is where I skip forward a little bit is I was looking at how do businesses think about value supply chains. So Jim Owens the former CEO of Caterpillar supposedly said well he did say the competitor that best manages their supply chain is probably going to be the most successful competitor over time and this was part of a McKinsey study and McKinsey basically did a study on how do firms react to global supply chains and they said that the key aspect is that they are splintering up the monolithic supply chains that we've had in our past into smaller more flexible ones that adapt to the complexity of the services and still can provide customers their service. So this actually what does this mean for policy makers? Policy makers let's be honest have a tendency to try to find ways how can we grab pieces of the global supply chain and hold on to them and not let them go. If the McKinsey study is correct it suggests that basically that won't work very well because companies are finding more nimble ways to get around supply chain aspects so when you hear about local content requirements which Ted's done a lot of work on this actually suggests that maybe this won't work so let me give you an example that is in the headlines right now and that is basically how do we process data so if you look in Brazil if you look in Europe and if you look in India and China you hear about countries partially because of the fallout from Edward Snowden partially because of their own as I said ability to try to grab part of the value chain one of the ideas that people have is let's create a we must put a cloud that is based just in Brazil or just in Europe so in other words you must have your I just forgot the name of it you must have servers thank you must have your servers actually located in that country now one I don't think that really will work but the reason supposedly is so we can't the NSA can't go and look and listen to things does anybody really think that's going to stop the NSA so maybe a better solution is one intelligence agencies deal with each other and have a real discussion and that probably needs to happen second maybe what we need to do if there are problems with data privacy and you're worried about what Facebook is doing or Google or whoever deal with them and have and find out what is the right regulatory environment for that and third but don't try to basically put a bunch of servers and try to cut the cord so to speak because all that's going to do is it's going to yes it'll probably harm Facebook and Google's business but it's also going to harm all your global supply chains that basically rely on very very sophisticated global servers in order to get things done as well as the local suppliers who are the people that they're trying to get products from and by the way I was very happy to see an old boss of mine Mike from and saying just yesterday that that is an intent of the United States in the TPP to try to actually have cross border flows as part of a trade agreement so those are the kind of two big things I was I thought about which is one we need to watch our protectionism and two maybe we need to do this if we can continue to figure out more and more information about global supply chains maybe that will help us avoid some of our sillier policy instincts I did have a couple specific points that I thought were worth pointing out one again from the study is the rise of services and how important services are and it doesn't get almost any play in this country which is if you look at services it is 50% of US exports 50% are made up of services now that's not service trade that's basically services part of manufactured exports services part of other types of exports and instead of when we look at that we never think about how do we think about getting better access for our services industries or at least it seems rare let me provide you an easy example XM Bank so the United States Export-Import Bank basically says you must have 85% of your content manufactured in the United States okay if you actually look around the world right now in all exports the average for exports is 70% so that's basically they're already well above that the United States it's around about 75% of their exports are manufactured in the United States if you look at other export credit agencies remember XM Bank says that it's in business to basically compete with other export credit agencies their levels are 50% and below 50% besides the United States at 85% alright so that's how you try to look at manufactured exports if you look at services basically XM Bank can almost not do business with service providers that are doing trying to export their goods so I think that instead of basically the administration bragging about how they're providing a billion dollars back to the treasury through all the work they're doing XM Bank or the opponents of XM Bank complaining about crony capitalism maybe the better idea is to try to actually find are there some solutions where we can actually modernize that bank and actually help our own providers one other issue that I wanted to mention which is kind of a weird one XM sort of weird I guess but is a different one is trade finance alright so trade finance is a very big issue in Latin America and elsewhere it is the way of basically if you think about it if your global supply chains breaks up more and more and more trade finance becomes slightly riskier because you have to go to smaller and smaller institutions and figure out ways to finance them now trade finance by large is not a very big money making business it's kind of have very low margins business in the Basel capital chords that just have happened over the last few years we've basically taken we've made the capital charge you must take for taking any trade finance opportunity and raised it what is that going to do it is going to probably have an effect over time on trade finance because it is a low margin business and so it will suggest if you're a financial institution why take a risk on that when I have to have this type of capital when I can do it on other things so that's kind of the types of things I see when I see global supply chains I think it goes back to the point that everybody's made so far which is you have to think about how is this affecting you as a policy maker and sometimes it might be a little thing like the trade finance type of issues or it may be something big which is there's got to be a better way than some of the protect just measures we try to come up with thank you very much thank you clay and thanks thanks to the whole panel we now have as my grandfather would have said we've dumped a lot of hay on the horses this morning and there's a lot of content and I'm going to open the floor for questions for a few minutes before to it and if I could impose on Nancy who's still here if you have a question for Nancy she's just not at her head so she'll be available as well three rules for questions first wait for the microphone we have a large online audience and the webcast is being recorded so they won't hear who you are before your question until you speak into the microphone second start with your name and organization and third what I call the Alex Trebek rule which is make sure your question is in the form of a question with that I'll open it up yes sir hi Tony Carroll Manchester trade I'm also a senior associate here at the Africa program and Nancy I'm going to put you on the spot I think the figure now is close to 90 billion dollars in what used to be called diaspora or now including crowd funding coming into the developing world and a lot of that is striving to find coherence and relevance and I'm wondering whether or not some of these sort of repatriated investment from the diaspora communities cannot find a way into being used in creative financing for global value chains are you talking about your root capital I'm wondering whether or not that this might be a vehicle in which some of that funding could be both provide attractive returns but also provide value in providing you know capital in areas of major financial institutions just don't yet know how to manage that's a great question and and raises a channel for finance that that can be a very powerful channel it has been a powerful channel for individual countries for a long time countries like Haiti countries like Armenia where the substantial part of the population is outside the country those financial flows in terms of remittances investment are very large in relation to the size of economies but as you point out now we have platforms to intermediate that finance that we did not have before we no longer have to rely simply on financial institutions that have branches in the recipient country so let me just mention two different kinds of examples of the power of that of that flow one is in Haiti you know which I think remittances account for some nearly 20% of the Haitian economy or their one fifth of the size of the Haitian economy so they're big but they normally come in the form of cash basically there are transfers either for money transfer organizations or in some cases through financial institutions and you basically the recipient pulls out the cash we have experimented with a project in which we have created a platform so that the remittance sender can buy something in the purchase something in a contract in the United States and have it delivered to the family in Haiti and the particular thing, the particular platform is run by an organization called Arc Finance and it is selling solar lanterns and ultimately we hope cook stoves environmentally sustainable cook stoves so the idea is you're in New York you have a relative in Haiti you purchase the solar lantern the solar lantern is either delivered to the family in Haiti or the family has a local distribution point so it's sort of like the Amazon.com of lanterns and what we found you know the question the hypothesis was that if you provided this useful product the remittance provider would be motivated to purchase it rather than send cash but you know you could have argued the other way the remittance provider doesn't actually really want to control what happens with the cash they just want to send the cash turns out it's very attractive to the remittance sender so the whole market exploded very quickly and in fact is now going to be replicated in other parts of the world in Africa in particular so you can use those those platforms to sort of accomplish several objectives to transmit value to give people in poor countries access to products that they otherwise wouldn't be able to purchase then let me just mention a totally different example this is really kind of a alright very quickly Japan Japan has diaspora in Peru there is a crowd funding platform in Japan in which ordinary Japanese want to fund Japanese descent farmers in Peru and they're using this crowd funding platform and it's quite large so these crowdfunding channels can be powerful to connect diaspora with home country individuals thank you another question my name is Daniel Hernandez representing USAID this question is also for Nancy Lee I was just wondering in the presentation you had mentioned I'm CSR I wasn't sure what that meant if you could explain what that is and then I was also curious I had seen before there was an organization called the Ankay Foundation which also helps to empower Peruvian youth on regards to education I saw IDB works with it so I was wondering if they also utilize the social business model okay thanks so very briefly CSR's corporate social responsibility organizations that large corporations do things which have social value so I was just trying to make the point that's still a significant motivator but their own business models are now providing an increasingly powerful motivator for these kinds of high social value activities and the organization that you're referring to one thing I didn't talk about was the labor part of the value chain which is also a powerful motivator for corporations that have difficulty in attracting skilled people for entry level jobs so that's another big area that we're working we and other development organizations USAID certainly are working in in terms of partnering with corporations to train young people for entry level jobs not just for their own hires but for for a wide variety of entry level jobs thank you and please join me in thanking our panelists and Nancy for their contribution we're now going to go where no CSIS program has gone before I mean that literally we're in our new building one of the things I've learned about construction is that the contract for the audio visual support began after the construction contract was completed we are welcoming via video link Mr. Dirk Pielot Dr. Pielot is leading a major project at the OECD he's the head of the structural policy division and the director of science, technology and industry has been at the OECD for 20 years and is leading groundbreaking work on how to measure the added value of global value chains. This is work that it actually builds directly off comments that Clay Rowell already made in his remarks about politicians reacting to the wrong data. If we can get politicians to think about the ways Dirk is actually measuring the way the real world operates instead of complaining about bilateral trade deficits, we'll move the debate forward and we'll have a better policy environment. So we're hoping to have Dirk appear on the screen and make this presentation and let me stop talking and see if Dirk is there. This is what's known in the business is performing without a net. Dirk, I think we just heard you. You can hear me now. Now you're coming through a lot and Claire. Thank you and welcome. Thanks for doing this. Scott, thank you for the introduction. Sorry for the technicalities. Paul Nadeau and I have really tried to make this work for a little while. Thank you very much for the introduction. I wanted to give you a little bit of an overview of what the OECD is doing on this topic. You've introduced me as leading this work, but this is something which we are trying to do across the OECD with quite a number of big team. We're also working very closely with the WTO and I was listening into your discussion earlier on where you already touched on some of the things which we're trying to do. The idea is really to try and get a better handle on these global value chains. I just wanted to take too much introduction. I just wanted to talk a little bit about what we're trying to do and this is what we've called measuring trade and value edit and I'll explain that a little bit in a second. We also wanted to talk then a little bit how we see different countries which we are currently covering in our database being positioned in these global value chains. I then wanted to talk a little bit how you can benefit from global value chains and to development and then perhaps at the end touch on a couple of policy issues which were raised also by in your discussion already. So I think you're all familiar with what global value chains are so I don't want to dwell too much on that and we have this big growth of these international production networks with a lot of intra-industry trade happening in them. A lot of this involves multinational enterprises which also do activities within their own networks. We've seen probably much more specialized and complex production relationships evolving in these sectors where certain stages of production are undertaken and activities in certain countries and other parts in another country and you get assembly then happening again in other countries. Just to give you a few examples these are a couple of case studies which we've just put together. There are many, from very simple things like the production of a t-shirt involving cotton and production perhaps in China more complex products like a Barbie doll which is actually more complex than you might think two cars, a dream liner or an iPhone all of them which involve many components which have to be put together from across the world. Now, case studies are interesting but the problem is a little bit that it's hard to really draw general lessons from them and what we've tried to do is move a little bit beyond these case studies by really trying to measure these global value chains and the problem which you have is that whenever a good product crosses a border several times at different stages of processing that trade statistics will record that product every time so if you have a component for instance which goes into eventually into an iPhone or an iPad any time it will cross the border as part of another component it will be counted and that means you get an enormous amount of double counting happening in trade statistics which then really conceals what is really happening in international trade. The other problem we have and that's one which is a lot harder that we don't quite know where the income flows which are linked to this trade or going to but that's something we're not able to deal with yet but the real issue is that we have this multiple counting going on and that's what we've been trying to work on so the idea is to go then into and the example here is the one you're all very familiar with is the iPhone which has been analyzed in some detail where you have the assembly taking place in China in the box contractors you have components coming from the United States flowing to China and you have the final goods flowing from China to the United States and here the example deals with about 10 million units. Now if you would just look at the US and China you would get a very large negative bilateral trade deficit of the US with China for this particular product however if you're then starting to well where are the components actually coming from and who's actually adding value in the process you get a very different picture because then you see that countries like Germany, Korea, but also Taiwan and the rest of the world provide lots of components which then are assembled in China and if you then sort of break this bilateral trade balance down into who's really generating the value you get a very different picture and that's for instance where a lot of the deficit will actually shift to Korea because Samsung is making lots of the components for the iPhone. So that's the idea what we have been trying to do not just for one product but really to try and do it for a lot of global trade and the ideas here is that we go from trying to really break down international trade by who's actually adding value to by looking at the suppliers by looking at the role of different tiers of suppliers into the whole process and the way to do that is that you have to break down trade in all its different components in terms of who's adding the value. There are four different components and what we do here is relies on a very large input output table. An input output table basically shows the relationships between different industries. So what is flowing in terms of intermediate inputs from one sector of the economy to another and what is feeding into the production process and what we've done is build an input output table which currently covers 56 countries, 57 countries actually. We're constantly adding countries, we're covering about 95% of world GDP at the moment and what we're trying to do here is break down between what is foreign value added so what comes really from abroad and what is domestic value added. And there are different components here so if you just take a second on this, if you look at domestic value added, there is one part which is basically if you look at a sector of the economy like pharmaceuticals for instance, part of that would be the value added which is generated in that industry, what is really generated by the pharmaceutical sector. Then another part would be components which come on parts and services which come from other domestic industries for instance in the United States so that's the second part which is indirect domestic value added generated in purely domestic transactions. Then there's a third part which is basically all the things which directly come from abroad and which are produced by other countries so that's foreign value added which is feeding into the production process in your country and there's a final component which is the most complex one, this is basically things which you're exporting which then are processed abroad and then come back to your country. So basically this is actually things which you've actually produced, this is value added which has been generated in your country and that's the final component which we call indirect domestic value added. I don't want to take you to all the complexities this is quite a difficult thing but what we are trying to do here is build this big input-output table which we link with very detailed trade statistics, we cover 57 countries as I said all the 34 OSD member countries, all the BRICS we've worked very closely with some of the BRICS, China for instance has been very active in this work we have 9 economies in Southeast Asia we covered 95% of GDP 90% of world trade and we're constantly trying to add countries in the process for instance we're currently trying to add Colombia and Costa Rica I'll come back to that in a second. Now the things you can start to do with these types of indicators are a couple of things the first thing we can do is actually look at this foreign value added so we can see how much of the exports of your country are basically built on value added coming from abroad now this goes from this covers OECD countries the latest data we have is for 2009 for the US it's just over 10% very relatively small but of course this reflects the size of the US economy a little bit larger for Japan but going all the way up to some countries in the OECD like Korea where about 40% of the exports are basically involved foreign value added these are the OECD countries we can do the same for the emerging economies for which we have data and there it goes from very little in a country like Saudi Arabia and also in Russia to a fairly large share in China about 30% in the middle to almost over 50% in a country like Singapore so a very large share of foreign value added and that basically means this basically is what you need as imports to produce exports in your own country so that's I think an interesting feature of the data which we can look at we can also look more broadly on how countries are really involved in these global value chains and what we do here is to I'll skip this one is to look at what we call backward participation and forward participation the backward one is basically what I showed to you already this is basically how much of your exports are based on imports coming from somewhere else so basically that's basically looking backward in the value chain we can also look at forward participation and this is how your exports actually feed into exports of another country and you again see that some countries play a very large role here particularly some of the national resource producers in the middle of the chart have Norway and of course Norway is not particularly a country which does a lot in terms of value chain it's not a particularly industrial country but it is a very large exporter of oil and that means that a lot of its products will actually feed into exports of other countries you see the same happening for Australia a little bit to the right of the screen and also the United States where the white bars is a lot larger than the blue bar again we can do the same on this also for emerging economies and here you see that countries like Russia and also Saudi Arabia have very large white bars which basically shows that they have they're not particularly important in global value chains as being processes of industrial products but they are pretty important in feeding into value chains further down the line so these are the types of indicators which we can produce with this we also have this at the industry level another point which really comes from the data and I think was already mentioned by one of the previous speakers I was listening to is that we now see that services are really really important in these value chains we still think about services in international trade and perhaps it's 25% or so of total trade but there is a lot of value of services which is really embodied in the exports of goods and here we can see this for different countries in a country like the UK on the left of the chart almost 60% of the value of their trade, of their exports is basically services so services are becoming more and more important in trade in terms of and also the quality of services access to services become really important in terms of thinking in international trade agenda and that's one of the things which we've really been finding in this data and this is not only the services sector itself if you look in some detail also in manufacturing sectors a lot of the value there nowadays comes from the services which are being added like distribution services but also financial services, business services which are really important and I think if you're thinking about lots of companies we know nowadays that a lot of them the value which they're making and the way they differentiate their products often have to do with the services that they're adding in the production process so these are a couple of the indicators which we can derive I think there are also areas where we hear particularly from some developing countries we hear concerns that they still feel well we're not actually creating a lot of value and an example of this is China where the example of the iPhone already shows that this assembly going on where very little value is sometimes being created nationally and what has been done and the Chinese have worked with us on this database is to try and distinguish what is processing trade and what is non-processing trade so processing trade is basically a foreign multinational coming in, an American, a European, a Japanese a Korean multinational coming in and doing some assembly or processing in China of components which often means that there is very little already limited value creation in China and you can see that in the chart where the blue bars for processing trade are a lot lower than for non-processing trade but what is happening in China at the moment is that you see that this processing trade is also evolving that more value is being created as China is slowly starting to move up the value chain in many of these sectors we also can look at this with our own data this comes from the work from Copeman and also the Chinese Academy of Science but we can also look at this with our own data and I don't want you to go into too much detail here but if you just look at the two bars in the middle machinery and electrical equipment where you basically see that a lot of the value which is basically sort of being created in the machinery and equipment sector and electrical equipment sector in Mexico is still foreign foreign is really foreign value added and this is very much like the case of the iPhone or the iPad where most of this is assembly which is being done in Mexico where relatively little value is being added in the process I think a final point from a database and this was mentioned I think also by Loury already is what it tells us about bilateral trade balances and China is one example another one is Mexico Mexico has a fairly large also sort of an issue of the trade balance with the United States and here again it really affects the trade balance if you look at it in what we call gross terms we look at it in value added terms so if we really make this distinction between trade in sort of the way we normally look at it and if we measure it in true value added terms we get a very different perspective on where the deficit for Mexico is in this case so it's a way of trying to adjust to also the discussion on trade and policies related to global value chains so let me try to go through a couple of policy issues and I'll come back to a few other indicators in a second I think the first thing which we've been trying to draw from this work is to really say that these global value chains are really about imports and exports you really need to have exports to try and sort of imports to be able to export so it's not a question of if you have a barrier on your imports you're actually taxing your own exports and particularly also if we know that sometimes components cross many borders that trade barriers can become really sort of can add up so a component which is being affected by lots of trade barriers over time are more expensive as a component into the global value chain the third part here is that a lot of this is also about sort of trade facilitation and efficient services the way these global value chains work you really have to make sure that their efficient firms are really thinking very hard about how much time does it take how much how costly is it to outsource certain parts of certain countries so making it easier to trade and make it efficient to sort of trade across borders and be involved in these value changes is really important I think a final part here is that of course it's not only about trade because a lot of what's happening here is also linked to investment it has to do with the role of multinational companies so how easy it is to bring come into to different markets to enter certain markets and to do business there so what we are starting to see a little bit is that a lot of discussion also now in bilateral and regional trade agreements of course is much broader than only trade and needs to cover far more things than just trade to really work out other point I think is when we are looking a little bit more also in what it implies for competitors of countries we sometimes now say that what you do matters more than what you sell and what I mean with that is what you do means what exactly are you doing in a value chain what is the activity you are involved in what's the stage which you are involved in rather than what you sell because in a sense China may be seen selling sort of the iPad or being the final assembler but that is not really what is the most sort of the stage of the process where a lot of the value is being created so you need to look very carefully I think as a company and of course governments have some interest in this as well in terms of what actually are you involved in and what are your strengths and weaknesses I already made a point that it really depends on exports and imports that we still have a little bit sometimes a mindset that exports are goods and imports are bad I think it is very clear that you need them both and also it means that sometimes you need to outsource things as well I mentioned already manufacturing I think we still see that manufacturing is still the main channel through which a lot of trade happens in global value chains but a lot of it now really the value creation is more and more linked to the services because that enables you to customize the demand that is where a lot of the value creation is increasingly happening the final point here is really that I think what we are starting to see as well is that a lot of the competitors in these value chains depends on thinking about things which stick to your own country so still some of these value chains can be relatively footloose things can move to other locations and what a lot of governments are trying to look at is basically well how can we make some of these things stick to a certain location and what comes in there is the thinking about this is a curve which some of you may have seen before it's called a smiley curve and this is basically trying to look at a simple value chain in this case in the electronics industry and trying to see well where is the value really in this value chain and I think what we are seeing is that more and more the value is really in the beginning where we have things like R&D where we have design and other sort of services which are sometimes more complex components which are feeding in and at the end where we have services marketing and other things which are also often more high value added whereas a lot of the things which are in the middle where assembly is taking place and some of the production is taking place may not be as high value added in terms of what is happening now just to give you of examples here and just to say for instance a shoe a sport shoe very relatively cheap to make nowadays a lot of this is very much produced in many Asian countries nowadays a lot of the value is in the distribution a lot of the value is in the branding and sort of the the marketing which is related to the product and we are starting to see that with more and more products that the value is not so much in the production itself but in more complex services knowledge related, intangible related which allow companies to add value and also to help them to differentiate themselves from from competitors I want to take you through this a point perhaps to to make on this because I saw the title of your session or your conference was also on economic development I think there is also an argument about well are these global value chains really making it easier for developing countries to become involved and the argument which I think a lot of people have said have made is that perhaps it's easier for particularly for smaller developing countries to join the value chain to basically say well let's get involved in a certain stage of the production process because what we've seen sometimes in the past that countries have really tried to build up their own value chain which is really expensive really costly and not something which is very easy to do so what I think more and more countries are trying to do is say well let's get involved in a certain stage of the value chain and then at least it will give us access to knowledge it will start us but that means then that participation in these global value chains is really important so that these countries really need to think very carefully about their border policies about their whole business environment to make it easier for them to access and then if you want to move up the value chain you need to think about well how you sort of improve your skills, how you innovate in these things and also how you can sort of move up over time just to one example of a country which has been very active in this area is Costa Rica this is a slide which was presented by the Minister of Trade of Costa Rica at a conference we had in Mexico last year and they were really trying to say well these are the types of things where we think we can really develop our own agenda by diversifying, participating in more global value chains to increase the types of things which we're doing to get more firms involved and strengthen our global value chains by increasing our local content and that doesn't necessarily mean for regulation but really I think to try and sort of think about how you can sort of improve the quality and the types of services and product which you're making to strengthen the linkages with local suppliers and then to upgrade in terms of innovation, science and technology and focusing more on high skill tasks. So these are the types of discussions which I think our work is currently leading to and I just wanted to end with a couple of conclusions before I say a few words what we're doing in terms of next steps first I think what our work really shows is that there is a growing interconnectedness with the global economy so that we have openness that what's really important is that you need this openness in global value chains not just with trade but also in terms of investment that imports nowadays are just as important for competitiveness and exports and that competitiveness is increasing about what you do and not necessarily what you sell so I think thinking about tasks, thinking about stages and thinking about activities is something which I think a lot of firms but sometimes also governments are doing I already mentioned this importance of this intangible knowledge capital I think this is something which we're currently working on at the moment to try and understand better this link between investment and knowledge and the success that different countries have in these global value chains and then finally I think the whole issue of service is that these are really really important because that enables you to differentiate but also this is where a lot of the value is being created so in many countries this I think still requires thinking about regulation to try and improve the quality of the services sector over time let me say a few words about the next steps in our work we released this database in January last year and then revised version in May we're currently trying to improve it trying to add more countries this will go slowly a lot of countries actually don't have some of the required data so we have to do this slowly over time more industries we currently have about a distinction of 17, 18 industries we'll try to add about 7, 8 to 10 more in the course of next year we're trying to look at not only at where value is being created but also where employment is being generated in these value chains we want to look more closely at the link to investment most of this is about trade but to better understand the role of multinationals and also try to understand where income is flowing in these global change which is really difficult to try and better understand the link to innovation and to also look a little bit at what the future trends which are happening in this area just to give you two final examples of work which we have just published last week we are now starting to look at well at job creation which is linked to these global value chains so this is basically just looking at the percentage of jobs in the business sector which depend on foreign channel demand so this is something which we can do also with this data so you see in countries like the United States and Brazil that about 10% of jobs in the business sector depend on foreign final demand whereas in Germany it's about 35% so of course depending on the size of the economy and also the share of trade and we can also look at what are the regions where this demand is coming from so for instance you can see that for a country like Japan of course a lot of the demand will come from East Asia whereas for the United States a lot of it will come from another region for European countries obviously a lot comes from European countries so these are the types of things which we can explore and meet more detail and where we want to work on in the future and let me end by a little bit of advertising these are just a couple of links this is a publication which we put out earlier this year where you can find a lot more detail with chapters on trade policy, on investment policy and also explanation more on the database you have a few links there on to our website which gives you I think quite a bit more information about the work which we've done also with country notes, with data and indicators on about 40 countries, all the OSD countries and the major BRICS and also a link to our score board where we have a lot more of the information which is available in the database and my final slide just to thank you very much and also if there's anything I cannot help you with straight away don't hesitate to send me an email later on so thank you very much thank you Dirk we appreciate your long distance engagement I'm personally thrilled the technology worked so thanks to the AV crew and everybody here at CSIS for making this work and Dirk your team at the OSD we have time for one or two questions I kind of feel like that far side cartoon where the guy holds up his hand and says may I leave my brain is full hearing none we'll move on but thank you again Dirk okay, okay, thank you very much good luck and for those of you who talked to congressmen about about our trade deficits give them a copy of Dirk's report it's a fabulous easily accessible document on how this thing actually works let me now invite our second panel to come up to the front we're going to shift gears here anywhere you'd like we're going to shift gears from the policy and theory to the practice and delighted to welcome three panelists who can choose the order they're speaking but let me introduce them in alphabetical order Paul Delaney is partner at Powell House Group and has a fascinating career in the supply chain business he was worked at the US Trade Representative's he worked at the International Trade Council on the Senate Finance Committee and in between those assignments was an attorney for FedEx Express and now does work in global supply chains for the Kyle House Group Shibana Faruqi is director private sector or public sector advocacy services for PricewaterhouseCoopers she has a specializes in supply chain management and has deep knowledge of developing economy health sector in particular which she'll talk about she's Sarah Thorn senior director of federal government relations for Walmart stores Sarah's company Walmart is one of the most sophisticated supply chain operators on the planet but Sarah herself has led the team that developed Walmart's Women's Empowerment Initiative so thank you for coming and we welcome you is that on? well thank you Scott and thank you CSIS again for the invitation today and as Scott mentioned I've actually been I guess blessed to work on a number of these issues both at the U.S. Trade Representative's Office at FedEx and at the Senate Finance Committee so the global value chain and some of what I'm going to talk about the global supply chain issues and how they interrelate I think are viewed quite differently from the policy makers or the legislators as it is from the businesses as we heard throughout this morning we really have seen a sea change in terms of the scope and the scale of trade I came across a number about global GDP how it doubled between year zero and year 1500 and then doubled again between 1500 and 1800 and then doubled again between 1800 and 1900 and then quadrupled between 1900 and 2000 and the last 10 years even putting aside the global the great recession has seen even more rapid growth as you heard from the presentations this morning one of these phenomenons has been the development of the global value chain and then also the disaggregation of value chains you don't see the sort of vertically integrated export USA or export China or whatever platform that you saw in the past and this new phenomenon has really created unprecedented opportunities for the developing world because as you break up those into a series of pieces I think as someone said companies become more nimble and can actually shift different aspects of the value chain to different markets or different companies that really does create a whole new set of opportunities for the developing world and frankly the developing world is predominantly made up of very small or SME type businesses so that disaggregation again gives them an opportunity that they've not had in the past so at this moment where we see this disaggregation we also see shifting demand trends so from a FedEx boardroom perspective when I used to work with my colleagues down in Memphis there are whole business strategic divisions that all they're looking at is where is the shifting demand and for what and what we're seeing is the rise of Asia the rise in Latin America and elsewhere as that new middle class has created these supply chains, these global value chains will be reaching hundreds of millions of new consumers so that creates a whole new set of issues and challenges one being geography one of the things you learn at FedEx very quickly is where you're located is essential and you want to be located in the middle of activity Fred Smith was famous for creating the hub-spoke model if you go to Memphis on any night you can see 15,000 workers between 11 and 2 in the morning helping manage the 160 some odd jets that are landing every 45 seconds loading millions of packages in 22 minutes having them resorted on a thousand vehicles being reloaded on these planes and the planes taking off going all throughout the world that new model was predicated on this idea if you look at Memphis Memphis is actually centrally located in terms of where the economic activity in the United States is and there's other hubs in Alaska and California and elsewhere so this new opportunity of new demand, new consumers presents the developing world who for geographic reasons may be more closely located to where the new growth is one of the things that I was struck by from the private sector time and working with colleagues in other sectors is that technologically there truly are no limits with ICT transportation and delivery services we have the capacity to design, manufacture and distribute and sell anywhere almost in real time so what we can do has no limits from the capacity side but what we can do is dramatically constrained by the types of, we've heard about this already today trade, investment, regulatory customs, other barriers that are making it difficult to deploy that full range of services or technology around the world so I'm just going to take a few minutes to focus on one key element from really more of the corporation perspective of how do you use global value chains to ignite and spur development and I think we need to look at how or why are certain countries not able to participate in the global economy and get into those global value chains and often that can be really tied directly towards the inability to plug into the global supply chain and what I mean by that is again as you've disaggregated these pieces of the value chain as you do what's called just in time manufacturing so you may have a product that has components that were manufactured and assembled in 15 countries that requires a transportation and ICT logistics infrastructure to maintain that supply chain so if you're going to plug into it there are certain fundamentals that you have to address in terms of customs modernization in terms of services liberalization so that companies can actually provide that full suite of services to help those developing countries and their small businesses and their workers play a role in that global supply chain so that I know we've only plenty of time for questions so the only thing I would sort of leave you all with is to consider this that the value chains have disaggregated and are nimble and are sort of network based and are flexible the companies when they choose to invest it's really a binary choice so it's the whole range of policies investment climate regulatory customs what I need to do what I need to do for that piece of the value chain exists in the country or it does not so looking at all of those policy areas holistically is really the change in thinking that has to happen both for US policy makers as they do trade negotiations and look at development policy but also for the developing countries themselves to clarify the sectors that they want to attract for foreign investment they need to look at what are the customs investment services transportation what are the types of constraints in a regulatory framework that exists maybe historic or traditional type systems that they've inherited what are those barriers that are preventing them from helping that company make a decision that yes they have taken all of the steps that are necessary they have reached that tipping point and therefore we are going to help and include them I think so my colleagues will talk about this include their businesses their workers as part of that value chain so thank you thank you Sarah okay well thanks and that's a great introduction so I work with Walmart Walmart is a pretty big company we're about a $470 billion company now we operate in 26 markets around the world we have over 2 million people who work with us and one of the things we've been working on over the last several years is now that we are such a big concern now that we are such a global company how do we use that scale for good because oftentimes in our history and continuing anybody who lives in Washington DC will know you know when you are very big the reputation of your company becomes almost a lightning rod for every issue and every social issue and also one of the things we've recognized pretty clearly is because of our scale we can't exhaust resources we actually have to be building resources and we have to be thinking sustainably about how we operate and so when we started looking at these issues of development we talked to a lot of people and a lot of our critics and we talked about what are the assets that we bring to this issue and really they are pretty simple we buy a lot we have a lot of jobs so what's the delta in terms of helping we'll figure out how they either sell to us and sell to us locally and globally or how they get one of our jobs and retail jobs are actually great training ground for future jobs because you don't need a lot of professional training to do a retail job we'll train you on the job but you do need to know certain things about how you show up how you dress, what is customer service those soft skills that actually in the long run help us succeed in any job that we have and so what I wanted to talk to you to really walk through today is just a couple of case studies and how we're working on this issue of value chains and development the role we're playing and then some of the policy area takeaways that we've seen as we've started to work in this space so in that area of jobs you know one of the things that we've really been focused on is how do we get more SMEs into our value chain in many of the emerging economies that we operate obviously SMEs are the predominant economic force and so but we're set up as a big large multinational retailer so we're set up to work on scale we're set up to buy a lot and to sell it at a lower price and so working with SMEs requires us to rethink how we work in the environments in which we're working because essentially when you're working with smaller companies they have smaller volume and sometimes higher prices but the benefit of working with smaller industries is that you get a locally tailored product and more importantly to us is you're benefiting the local communities so as a global company one of the things we want in every environment in which we operate is the people and the communities around those stores to actually have incomes in their pockets so that they'll shop at our stores and one of the things we figured out pretty quickly is if we invest in women women will reinvest in their families in their communities women will hire other women women will mentor other women women will train other women so one of the areas that we're particularly focused on as Scott mentioned is helping women entrepreneurs succeed so this is a program that we have in Central America called sort of a hand to help where we recognize that if we were going to succeed in Central America we needed to figure out this big small issue and so the program is actually pretty simple we help we work with local governments we work with local associations to actually bring the SMEs into Walmart through local fairs and then once you're in the program we do a couple of things to help SMEs succeed we accelerate financing so we do payments that are a little faster than the normal payment process because one of the biggest issues we've found for entrepreneurs and for small businesses is access to finance and capital flows we help them distribute their products so they can drop up for a cost and we can get it as opposed to saying that a small producer needs to do direct store delivery and we train them one of the biggest challenges we've found for some of our smaller entrepreneurs is an issue of packaging that you can go to the store and actually walk the store and say SME, SME, or PMA, PMA, PMA because the packaging just isn't the same as a multinational brand so how do you help with those basic skills to help these folks get in and what's interesting about Leticia is the supply of a year a couple years ago SME supply of the year in Central America is one of the things that we've found is it's really hard to take Leticia and sell her right now to the US stores there are big barriers in terms of scale capacity barriers to trade standards and issues but if she can scale locally with us if she can start working in Central America and then start exporting to local other economies in Central America so to Guatemala you can think about innovation and diversification because one of the challenges we find with SMEs is they produce one product and it's probably the product they knew how to produce when they were making them in their kitchen but when you're selling to a modern retailer you need to have and think about innovation for the customer because it's always about the customer so she can innovate she started with Latinitas now she's doing potato chips she can diversify her brand, she can get that capital flows and so actually create the development to the global value chain by essentially starting local and then glowing global and this is the same for the farmers we work with it's true that you know if you're going to work with Walmart you probably need a barcode you need to know how to do electronic data interchange you need to be thinking about how you work in the modern retail space so starting local and going global is probably for us we've seen as a better development effect the next case today I wanted to sort of showcase is a product that we put together on our dot com site called Empowering Women Together one of the things that we thought of when we put this program together was we have this amazing ability to showcase some of these great work from women artisans and women collectives and cooperatives on our dot com site and to expose these folks to US customers and global customers one of the things we've seen in working in the past with some development agencies is we were very project oriented so we'll do with maybe a development agency and we'll help this collective in this country and they'll create some nice jewelry for us and we'll take one order and in some ways that isn't a very good development project because it's not per se sustainable you've built up this capacity but you're chasing orders so how do we create longer term relationships with collectives and cooperatives how do we create more sustainable value chains so you're creating you're helping them essentially develop to know consumer taste and preference shipping what are the kinds of things we need to do to actually sell sustainably into the market as opposed to one-offs and so this is a group, Gahailinx that is in Rwanda they started actually making peace baskets years back the women who found Gahailinx are amazing they actually were working first in a cafeteria and they saw so many people coming in who didn't have food to eat so they were basically giving away food in their cafe and so there has to be a better way many of the women they started with were HIV positive and they needed money to buy their antiretrovirus the virus, the drugs and so they started making basically helping and linking to the markets one of the things we've done with them is to say, you know, we know the US customer so if you actually cut a design in a pattern in a way that we know this maxi dress is going to sell or we know what color is on trend it will help you link better to the customer and create a product that people are going to buy more than once and come back to and showcase it on our dot com site the one thing that we've learned from this experiment though is that big, big, big multinationals aren't always best placed for working at the base of the pyramid one of the things we had to do is actually get an intermediary aggregator who could help us in NGO kind of translate our standards for suppliers our requirements for shipping, our EDI to help them learn and hopefully create kind of angel brokers who then will pass them on directly to us because there was just too much of a delta between us and them one of the other things we've learned and no, sorry, no disregard to FedEx is air shipment just eats your margin so a lot of these folks, while they have a great product getting transportation and logistics hubs in a lot of these places is going to be the most important thing and figuring out how you create a sustainable value chain every chain, every part of the value chain is making profit and then tariffs and issues like that these folks are making a peril and yet we have, I see my friends out there we have the worst regressive tariff system and it's a tax on the poorest people here in the United States and the poorest producers where we're charging the most on the least so we need to think about the policy implications of development in the trade system and very quickly the last thing I mentioned is our jobs, one of the things that we got pretty quickly when we went into India was there's just incredible amounts of talent that have never been really trained for working in the formal economy same thing in Brazil, wonderful lots of youth but aren't really skilled or trained well to work in our stores and so we started to partner with local governments local NGOs to create what we call social retail schools that are largely soft skills but also some how do you run a cash register what do you do with inventory what do you do with these folks into our stores and train them ourselves because and like in many retailers 74% of our managers come from our hourly pool so we'll train you but you have to get in and you have to know how to succeed and so it's really interesting Amandeep started she's actually now entered into an MBA program but you know these schools are actually giving a lot of hope to folks because we're actually training them not just to train numbers but for the jobs that exist that kind of approach and Nancy Lee was here in the morning working with IDB and others to say we've got this curriculum we have this capacity how do we take that and take all the other multinationals in the Americas who have jobs and try to scale this at cost and do essentially the most good for the least amount of money which is what we're trying to figure out so this is just a snapshot about how some multinationals are thinking about global value chains and developments I think my key takeaways are one of the big challenges is how do you become locally relevant for us that means being a little smaller and a little more relevant to the pool of folks that we're working with two, this is good business it's not just the right thing to do it's the smart thing to do we really do want the communities we serve to be self-sufficient to have disposable income to grow and develop and so we have a role in that in thinking more inclusively about how we all grow together and third is if we don't get the policy environment right then we do will stay local and small you know we have incredible opportunities now with a globally interconnected world but we have a system that's sort of set up for an older world and so we need to actually work on the policy framework to make sure that these people as these were pulling these people in as they're growing and developing have the opportunity to become global players thanks thank you Sarah, Shabana thank you can you guys hear me? I want to thank you to CSIS for giving PWC the opportunity to speak today so I wanted to build on I think many of the comments would have come from the different presenters today but talk a little bit more specifically about how can we help make local companies more competitive so that they can participate in higher value activities within the supply chain so right now we're seeing developing economies not capitalizing as much as they could because they don't have the capabilities or the capacity to participate in those higher value activities and specifically I'd like to touch on three key areas one is on strengthening supply chains another is on developing manufacturing capabilities and capacity at the local level and then finally on implementing responsible business practices so the first one in my background as Scott alluded to when we first introduced me my background has been focusing on healthcare supply chains so I'm going to draw on that quite a bit as I talk briefly in the medical technologies industry we're seeing a lot of south south north south acquisitions looking primarily for the for the following benefits providing access to technologies that are tailored to local requirements but also providing access to distribution channels and distribution infrastructure as well as service and repair capabilities that the local firms currently have that MNCs would like to take advantage of so when you're looking at where in the supply chain might you focus system strengthening activities on these are some key areas for consideration another point within the health sector is that quite a within the health sector you have a parallel public sector supply chain system as well as a private sector supply chain system and you'll see development organizations are focusing quite a lot of money and effort trying to strengthen public sector supply chains one of the things that I like to talk about is potentially diverting some of that funding that's going towards propping up public sector supply chains that are often quite inefficient in their operations and potentially think about redistributing that money to focus on private sector supply chain so we're strengthening those activities areas that we see weaknesses in public sector supply chains particularly in the health sector is in areas around inventory management and distribution and warehousing and these are some areas where private sector organizations can can instead take that funding strengthen their own channels and then serve as valuable members of the global value chain human resources is another key constraint in the in the developing world what you are finding is supply chain is not a core competency for many it's not really the core competency it's not something that is in the core curriculum you have supply chain managers that do not have supply chain skills we've spent a lot of time trying to build these supply chain skills particularly for folks operating health care value chains supply chains we do find in the private sector I have PWC has worked with organizations in both the private and the public sector to try to strengthen health care supply chains and you do find quite an appetite at the private sector level to take in these lessons learned because you have that incentive to do so commercial incentive to go ahead and strengthen supply chains that incentive not so much necessarily there at the public sector level the incentive at the public sector level is to make sure that that countries are kind of meeting the minimum requirements imposed on them by donors so that they're receiving funding and so we do see there's a lot of there's a lot of will within private sector to kind of take these lessons learned from multinational organizations multilateral organizations to strengthen their own supply chains and so I think that much of the money that's being spent trying to to enhance and strengthen public sector supply chains could instead potentially reap more benefits if that money has been diverted to private sector manufacturing we do work quite a bit with manufacturing particularly in heavily regulated industries such as the health care industry challenges associated with this is that local companies do not have the quality processes in place to meet international standards and regulations and that limits their ability to kind of participate in these global value chains PWC does quite a lot of work trying to get firms up to speed to be able to to meet international requirements such as FDA regulations, CE marks getting them towards ISO 9000 standards even though they may not be able to meet that but at least start to develop these quality systems processes so you have consistency in manufacturing and then finally the last thing I like to talk about is minimizing business risk this is an area where I will say I am not an expert but so if you do have questions let's not focus on this one but I mean in areas another thing that precludes local participation in value chain is are things related to ethics, labor, health and safety and environmental concerns I think that's definitely an area and you've seen this in the news quite a bit garment with child labor with the fires in India garment factories it's exceedingly important that these local firms receive some kind of guidance in terms of how are you able to meet these minimum requirements around these key areas to make sure that MNCs that would partner with them are not risking their reputation by partnering with them and so that's one area where we don't see a lot of focus at least in the health sector a lot of emphasis to work with with local organizations to kind of help them get up to speed with Everguard and so happy to take your questions I'd like to do is open the floor for questions again again remember wait for the microphone introduce yourself and ask a question yes sir Hi David Mack from the Center for International Private Enterprise I actually do have a question on that last component so sorry about that mainly how are big companies like FedEx like Walmart managing their risk and compliance issues in their global supply chains given increasing pressures from anti-corruption legislation such as foreign practices act UK anti bribery act what does this affect MNCs in their decision to enter new markets and introduce new suppliers into their value chains sure excellent question and I think certainly from my four more colleagues that the FCPA is sort of front and center when you're a company that's servicing 220 countries and territories around the world by definition you're in some markets where there are some issues certainly from global logistics service providers perspective this very much I think goes to the point of the difficulty that some of the developing countries have participating in the global value chain because there are a number of in-country folks there's the legal teams looking at these issues so when a FedEx comes in and is going to service a market that interaction with the customs authority has to all be documented has to all be handled in a very careful way sometimes that means the customs authority won't cooperate sometimes it means packages just get held up for an inordinate period of time the end result of that is that the footprint of FedEx or UPS or DHL is going to be quite small and the ability of the consumers and the businesses in that economy in that developing country to participate in these global value chains is going to be dramatically diminished so it is a front and center issue I think one of the things that I find interesting is that as you see the discussions about sustainable development and what are the key elements or the key reforms that you need that the strengthening of rule of law is always first and foremost one of the key elements that also will always be a top priority for the private sector because that commitment to rule of law that commitment to open regulatory regimes and transparency allows a larger company whether it is a logistic provider or another company setting up its supply chain to have the confidence to scale up because it can help navigate those FCPA and other issues just to add to that obviously compliance is paramount I think we are sort of seeing a very interesting phenomenon now where the end of the chain is seen to many stakeholders to be absolutely responsible for the beginning of the chain even before it actually comes out of the ground so that is a real challenge for us because the systems and processes that we have built generally goes one back or two back and so issues like the lacy act or conflict minerals or some of these new well intentioned laws that we support the goal of which is don't put conflict minerals in your electronics I think we need to think about what the consequences of some of those are given the enforcement systems that exist because the last thing you want which is in fact what is happening now in the Congo is people saying just don't source from there because the infrastructure is not such that I can guarantee that it is safe and so I do think it is going to take a little bit more of that stakeholder dialogue to say what are the right approaches here how far back does the end have responsibility for the beginning and what are the right levers in terms of working collectively against these common goals of everybody wants to work in a decent safe environment be paid appropriately have the right rules et cetera especially also where you have governments that have abdicated that role what's the role of the private sector whether the role of the government or the role of the international organizations I think we are getting there I think the transparency of the internet is forcing us to actually accelerate our approach in that area but I think it is probably something that we holistically need to address a little bit better I would just add from a donor perspective I think it is shifting the focus of the discussion and as I have turned to allude to a lot of the focus is really on public private partnerships to strengthen public sector capabilities and I think if you are in the course of the discussion to say there is a huge role for the private sector in development but not only that these are some issues that they are struggling with could multilateral organizations and development organizations not start to maybe dedicate some other resources towards addressing these issues which in my experience it is not really been the main priority I have the idea over here Jerry Jensen business driven development I wondered none of you addressed how you could leverage how and whether you have been able to leverage US development agencies in sustainable supply chains and I just wonder if you could talk a little bit about how you have done it and more importantly what are the opportunities going forward? So we have actually had a very robust engagement with US development agencies, international development agencies as well as multilateral institutions it has been an evolving partnership I think we have had to work through what is the right point of entry for us in terms of on the ground relationship building for example with USAID in the past I think the concept of public-private partnership was I have got some money you have got some money let us do a project and we have been shifting to say actually what is much more interesting about us is not my money but my business and so in Central America we have a couple of framework agreements and we just signed last month another global MOU with USAID to say we really actually need to think about business enabled philanthropy which is a tricky term but also we are so well positioned as an off taker so you are training a lot of farmers train them on our standards or on the standard that is common to many global retailers we will tell you what products we actually want we will help you think through the life cycle of that product in terms of let us not have everything ripened on the same day but we are going to do these for September March, April, May, June what kind of supply how much should you be planting so you are not over supplying and driving down your prices et cetera what are the market demands and so I have started to think about this a little bit as demand driven development which is start with the market first so if you are devising a training program for the youth bulge which is everywhere right what are the job requirements and where are the jobs and trained back into the system or who are the off takers it is not just us it is energy companies it is all of the consumer product companies that have really recognized that and it goes back to our enlightened self interest which is I need fresher, safer products I don't have the capability to train all these farmers on my own or in an area that there is a mutual benefit and we were talking earlier you know one of the things we have people coming and saying you are a great logistics company let's partner in logistics we are like we don't really need a lot of help so let's look for that sweet spot where we are getting something and we are getting to that same mutual development goal so I would take a different angle I think that was very helpful but I feel as a development organization to your point there are a lot of public private partnerships and I have seen it as a bit opportunistic and now there is a shifting environment where development organizations are really kind of there are two things going on I mean they are facing competition in terms of budgets but also they are held more accountable more and more towards outcomes and so they are looking at the supply chain as a whole system from a system approach that needs to become more innovative but I think we are kind of at the front end of this and a recognition that they need to view the supply chain and come up with some innovative solutions but I think as part of that kind of adopting working better with the private sector is going to be key over the next like 10, 20 years but I feel as though it is kind of a shift and it is fairly immature we are at an immature stage right now I would just add I would agree with both sets of comments and I think that it is important to think or consider start with US based companies they have been in every country in the world some US company has been there for decades and has been competing and doing something whether it is selling a product or providing a service and they provide experience in the market and now what we are seeing with the disaggregation of the value chain is that companies are rapidly expanding their footprint in a whole range of countries all around the world at different levels of development different culturally with different types of challenges and whether it is a FedEx logistics engineer who has to figure out how do I get these products out of this region or to this port to get on a ship through freight forwarding that is all they are doing is trying to figure out the answers to these questions unfortunately I think I agree that we are in the nation phase of this that immense amount of talent and resource and experience has not been where the development agencies went to first and I think that is going to be a big shift in how we approach these questions there is a statistic that I find striking that in 1960 or 61 in the CSIS report and others have noted that it was nearly 80% of the public dollars going in the developing world the United States were public dollars and today it is 9% so the entire the game is in private investment flows now whether it is coming from state-owned enterprises or private entities or companies or financing that is where the activity is that is what is going to determine the development track of these different countries and the presence in those countries is only getting more and more involved and Wal-Mart and others tapping into that experience and those best practices and those core competencies to shape how the development community which is very important and these agencies are very important to really prioritize where they focus their resources there is an opportunity here but we have to really seize it it has not been done I think effectively yet Thank you I have a question mainly for Sarah but I guess for anybody really it is mostly regarding your the way that you measure the impact of your programs and I was just curious how you do that specifically around sort of the community benefits and how that sort of filters down to the the company and also just to sort of add on to that I work for the school of public health so I am interested in health so sorry for imposing my agenda here but I was just curious from a business perspective within this conversation does health play a role and if so how does that work within the projects that you are doing So I think we are in that transformation on measuring outputs and outcomes so when we set a lot of these goals we set really big ambitious goals train a million farmers source a billion from small holder farmers you know double our sourcing from women and businesses that's because businesses understand numbers and I was the one taking these big decks to our CEO and saying we need to support this and they kind of focus on the one number what about this 20 billion you know you kind of have to do that and also as a guide it's a guiding principle what's interesting to me is the systemic change that you have to go through to actually get to big numbers so we do measure outputs what we're starting to measure more is this concept of outcomes so okay so you trained a million farmers so you doubled your sourcing from women and businesses what does that actually mean in a tangible sense and what we're finding is that the outcomes are broader and sometimes more diffuse so we're training a lot of women in factories because we notice that you can't know what women's economic empowerment and not think about those women have been working in those factories in apparel largely and in jewelry somewhat so one of the things we've said was you know those women probably we just haven't really thought through what are the opportunities they need and a lot of it is actually communication skills to think about self-esteem and self-worth and to ask about the things you need and then to understand your role in the business if you're working on a line of activity or participation health is a big component of that and hygiene is a big component of that as well as how do you manage the money that you have one of the more interesting things and we have DAI and academic institutions looking at the evaluation of this particular program is that the benefits of that have actually translated more into the community and how the women speak to their husbands and how they look at what's happening and why am I working in the factory and taking care of the kids and you know the there should be some more so that's the kind of thing because that's an outcome so that's something you know Sylvia Burwell was for a very brief time that of our foundation Matthews and so that's something that we're now thinking about we've never really thought about self as a development institution or doing development so we're really really thinking now about how do we measure, how do we replicate how do we scale, how do we leverage so taking that business mindset to what we're doing in this space in the health sector to address that comment I think it's very difficult to and actually most of the multilateral organizations are struggling to determine how do you link outcomes like if you're looking at outcomes like reduced morbidity and mortality how do you link that to a specific program and that's a harder thing to correlate but and I would say that probably one of the things you've mentioned is there needs to be a shared benefit for an organization like Walmart to get involved and so you do see a lot of these pharma companies or medical device companies partnering with development organizations to help strengthen infrastructure in countries so then ultimately to benefit their own bottom line that's where you would see that engagement in the health community Time for one more question Yes ma'am I'm Jennifer Bremen with DAI and one of the things that I've seen but I wanted to see whether you guys agree that this is going on is companies facing the policy challenges or structural challenges and recognizing that they can't do that alone and moving more towards collective action and forming alliances as a model or to address these things especially governance failures where safety in numbers and hopefully better impact but I wonder if you're seeing the same thing Sure I mean one of the things that was most interesting during the time when I was with FedEx is that their partnerships with their customers in country were invaluable assets in trying to make policy reforms in country so when the logistics provider partners with their customers so Walmart or whether it's Tata in India or whether it's a small businessman, whoever may be and then with that cross-sectoral focus and strength say look this policy or this governance issue or this customs issue or this structural reform is not about empowering a U.S. multinational company it's about connecting your poster child of success to the world economy so I definitely think I think that when companies and industries work together at all scales are much more effective both in U.S. policy advocacy and abroad so I mean I think that the Bangladesh issue you're referring to is sort of a sea change in the fact that many of the companies have been trying to work together for a long time and share information about audits and social compliance and these issues I think the severity of the issues there forced collective action I would say in a very accelerated time frame because you needed to share your data on what factors you're in what are the audits the audits are if you're doing a structural audit which companies never thought in some ways was their responsibility to say I need to actually I don't own this factory I don't even I contract with a supplier who contracts with the factory owner but somehow I'm like I said responsible for the integrity of that building which in many ways is actually a government function to ensure that they're built to code but given that we had committed to do that the best way to do it was to work together and share the data because you don't need to audit a structure 20 times you need to actually have one really good credible audit you can share so it's forced some collective action that I think we'll still see how do you continue that to address other larger societal issues if this is a structure because it is a the way it's set up it's set up on collaboration working with the ALO working with the USG working with the Accord trying to figure out collectively how do we address these issues well let me close by thanking you all for coming and spending a morning with us I hope this was worth your time and energy and please join me in thanking our panelists